Take The Time To Give Lifetime Gifts

Give as much as you can to family and friends during your lifetime. Though that has always made sense for anyone looking to benefit loved ones while reducing the size of a taxable estate, new rules have multiplied the advantages. But there’s only a two-year window for making the most of the latest provisions. Barring further legislation, all of the estate and gift tax breaks in the 2010 Tax Relief Act will expire after 2012.

Before a 2001 law changed the rules, the federal estate and gift tax systems were “unified.” That essentially meant that it didn’t matter whether a gift was made while you were alive or after your death—the combined taxable amount of the transfers could be reduced by a unified exemption. Give more than that exemption and you would owe either gift tax or estate tax. But the 2001 law separated the estate and gift tax systems beginning in 2004. The lifetime gift tax exemption remained at $1 million, while the estate tax exemption gradually rose to $3.5 million in 2009.

What didn’t change was your ability to give annual gifts that are also exempt from gift taxes. You continue to be able to make gifts of up to a specified annual value—$13,000 in 2011—to as many recipients as you like without owing gift tax. That exclusion is doubled for joint gifts by a married couple, and these annual gifts don’t reduce the exemption for lifetime gifts.

Following a one-year repeal of the estate tax in 2010, the new Tax Relief Act reunified the estate and gift tax systems and set a total exemption amount of $5 million for 2011 and 2012 (indexed for inflation in 2012). Once again, you can give combined lifetime and estate gifts of up to that amount without owing gift or estate taxes.

Suppose you are married and with your spouse own assets valued at $6 million. If both of you make maximum annual gifts to 10 children and grandchildren during the next two years, you can exclude a total of $520,000 (10 gifts of $26,000 times two years). Suppose you also divide another $2 million in gifts among your children. You’ll have reduced your estate by $2.52 million and you will still have a joint estate tax exemption of $8 million—the $10 million total for the two of you reduced by the $2 million in non-annual giving.

Because no one knows how the estate and gift tax laws will evolve after 2012, it makes even more sense to utilize the generous gift tax provisions while you can. Just keep in mind that you must give up control of your assets to qualify for the tax benefits. We can help you coordinate lifetime gifts as part of a comprehensive estate plan.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.